2nd March 2024 > > MSTR & OTC.

tl;dr

My conviction for MSTR has just got a lot stronger. With OTC stocks virtually exhausted, where will the ETFs find supply?

Market Snap

Market Wrap

Meme coins have been on a tear for the last twenty-four hours:

NINJA                   +34%

DOGE                    +20%

PEPE                      +20%

BABYDOGE         +50%

WIF                        +36%

Need I go on? I think a lot of meme coin trading (pure speculation) is on a leveraged basis, exacerbating the volatility, and causing a lot of pain for hot money.

Curious Cryptos’ Commentary – MSTR (MicroStrategy)

I have long favoured an overweight position in MTSR in my portfolio, based upon a simple recognition that as a leveraged play on the price of BTC, I would be foolish to ignore this conviction trade.

That isn’t to say that you should do the same – I am merely expressing my approach to extracting maximum value, as I see it, out of my crypto investment portfolio. I am sure any reasonable portfolio manager would look at my combination of cryptos and stocks and have a hissy fit on the spot. After all, I am a credit derivatives and old school bond trader. I am not skilled in the dark arts of valuing equities. So no, you should not take any of these discussions as anything more than just that, a discussion.

But I love coming across other random discussions that fit my world view (don’t we all). This is a more technical justification for MSTR, some concepts of which touch upon the outsized response in the price of BTC to relatively small injections of ETF capital:

https://twitter.com/PunterJeff/status/1757286744557555765

Essentially this model comes back to my opening premise. In the example he gives, if BTC rallies 4x then MSTR rallies 11x. That’s a beautiful leveraged play with no risk of liquidation. All one needs is conviction and a willingness to rotate.

Curious Cryptos’ Commentary – Oh my

Simple analysis shows that the vast majority of spot BTC ETF trades are of a retail size. Which could mean that it is mostly retail buying, or it could potentially be institutional buying that has been split into many smaller trades so as to not adversely impact the market from a buyer’s perspective.

Institutions previously bought only in the OTC market. The market price we know of BTC – the average clearing price across all respectable centralised cryptocurrency exchanges – has a 2% depth measured merely in the tens of millions, a pitifully small number.

The clearing price for OTC trades of a larger size, the price that is more reflective of the real value, is a different price, but is also unknowable to anyone but the parties to the trade. It’s the same principle as equity dark pools, which are a technological response to finding clearing prices for outsized equity trades.

In a bull market like this, one can be very sure that the clearing price for a large trade carries a significant premium to the price quoted in the market snap above. But that doesn’t mean your cryptos are worth more than you think. You cannot access the OTC market any more than you can jump to the moon.

…

I think this graph is paywalled by Glassnode, but I found it elsewhere, and it is far too important to ignore.

OTC holdings of BTC are virtually exhausted. It takes a bear market for those to be replenished, and that is not happening anytime soon.

Sure, OTC desks also broker between third parties but that becomes more difficult without any skin in the game. Virtually all ETF business, retail or institutional, must now be executed using the CEXs which have low liquidity relative to the daily inflows that we have been seeing of late. And as we have seen, retail interest has only just started getting going.

This supply shock, coupled with the stock float compression theory outlined by @PunterJeff in today’s first comment, suggests to me that there is a very rosy outlook for current holders.